Let the Bundesbank chief resign if he wants to. It'll be no bad thing

In the end, Jackson Hole proved more interesting for what Jens Weidmann, head of the German Bundesbank, had to say – or rather did not say – than Ben Bernanke's leisurely ramble through the deeper intracies of US monetary policy since the onset of the Great Recession. Anyone hoping for the announcement of a third bout of US quantitative easing would have been sadly disappointed. The most the Federal Reserve chairman was prepared to say was that the "Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery…". He neither ruled it out nor ruled it in.

Instead, the excitement was around Mr Weidmann, who according to German press reports has been threatening to resign over European Central Bank plans for a new programme of bond buying. Waylaid at Jackson Hole, Mr Weidmann refused to comment on these reports, which presumably means they must be true. If he did resign, it would be the third such German walk out over ECB bond buying after Jurgen Stark, who resigned late last year, and before him, Axel Weber, who was equally unable to contain his contempt for the practice.

Mario Draghi, the European Central Bank president, has opted out of Jackson Hole to work on the plan. With the likes of Mr Weidmann breathing down his neck, the bond buying may end up so watered down that it becomes largely irrelevant. Already, the plan has become so hedged around with conditions as to render it virtually worthless. In any case, it's due to be announced after the meeting of the ECB's governing council next Thursday.

Be brave Mr Draghi, and disregard Mr Weidmann's threats. I've got a great deal of sympathy for Mr Weidmann, who believes as a simple matter of principle that the central bank should not be printing money to fund government spending, but unless the ECB acts soon, the euro is for birds.

Rarely has the gulf that separates the exercise of monetary policy in the US and the UK on the one hand, and the eurozone at the other looked as great as it does from the clear mountain air of Jackson Hole. It's perfectly true, as Mr Weidmann is prone to point out, that the Fed would never buy the government debt of the individual states that make up the US of A. Indeed it would be illegal for it to do so. But it has been very active in injecting cash into the economy by buying up federal debt, and this is the means by which it has been providing monetary accommodation for the US as a whole.

In the eurozone, by contrast, we have seen the emergence of widely different monetary conditions between nations even though they all share the same currency. It's plainly intolerable that perfectly solvent Italian households and businesses should be forced to pay much higher real rates of interest than their German counterparts. Such discrimination only hardwires national differences in competitiveness into the euro area. It follows that Mr Draghi must urgently apply monetary stimulus in the form of bond buying to the parts of the eurozone economy that need it. To hell with Mr Weidmann's objections. What's Germany going to do if Mr Weidmann is defied? Leave the euro? Come to think of it…

Countries facing depressions and rapidly weakening inflation typically face very low borrowing costs: investors invest in government bonds for a want of profitable alternatives. This is what we see in the UK and US; borrowing costs remain at all-times low despite the extreme weakness of both countries' public finances and poor growth prospects. Investors certainly need to differentiate between eurozone governments, in order to ensure that risk is correctly priced. The Italian and Spanish authorities acknowledge this. But the current spread between the yield on German government debt and that of the Italian and Spanish governments wildly exceeds what is required to make sure investors differentiate appropriately.

The polarisation of borrowing costs has politically explosive distributional effects: Germany is borrowing and refinancing its existing debt at artificially low interest rates. According to the German Institute for the World Economy, investor flight from the government debt markets of the eurozone's struggling members to Germany has already saved the German government almost €70bn. Other countries face ruinously high borrowing costs, which are simultaneously increasing the scale of their reform challenges and narrowing their political scope to make the necessary reforms. The longer Italian and Spanish borrowing costs remain at such elevated levels, the greater the economic damage to those economies will be and the harder it will become for the two countries' governments to shore up the necessary political support for further reforms.

The reason why borrowing costs have diverged so much across the eurozone is not primarily because of divergent credit risk, though this does seem to be the commonly held view among Germans. Actually what it's about is convertibility risk. Because investors believe there is some risk of the periphery countries being forced out of the euro, they demand a premium. The process then becomes self fulfilling. By weakening the periphery's fiscal position and raising its private sector borrowing costs, the convertibility risk rises. Scarce and costly credit further undermines the chances of economic recovery.

It is therefore quite wrong to think of ECB bond buying as government financing. Actually, it's only about ensuring that the same monetary conditions exist in Italy and Spain as exist in Germany. And is that not what monetary union is meant to be about?

Mr Tilford draws an all too familiar conclusion. The ECB's bond buying programme will be large enough to ensure Mr Draghi, its architect, doesn't lose face, but it will be too small to dispel convetibility risk and underpin the ECB's credentials as a credible lender of last resort. The euro is becoming a tragedy without end.